About UCLA Anderson Global Supply Chain Blog
This blog is developed by the Decisions Operations and Technology Management (DOTM) Faculty at the UCLA Anderson School as well as special guests. It is intended to report, analyze, and comment on events that relate to current Global Supply Chain Management issues. Each blog is presented in English, (Simplified) Chinese, and (Castilian) Spanish, and it can take one of the following formats:
(a) An Interview -- the author formulates questions about a current issue, and the interviewee provides commentary.
(b) An insight -- the author provides insights concerning global supply chains, including current events.
(c) An analytical piece -- the author analyzes a particular supply chain issue and formulates descriptive and/or prescriptive views.
For more information on the blog contributors, check the DOTM website.

In 2013, Google launched Google Express, its rendition of an online shopping and delivery service. Within Google Express, customers can order products from a range of national retail stores including Costco, Target, PetSmart, and Whole Foods. It currently serves the Bay Area, Los Angeles, Boston, New York, Chicago, and Washington D.C., and it is testing fresh produce delivery in the Bay Area and Los Angeles. One of the primary aims of Google Express is to understand customer purchasing patterns within the grocery market. The US online grocery market had revenues of $13B in 2015, and forecasts indicate the market will grow to more than $42B in 2016[1]. There is intense competition in this industry: Google Express has 4% of the market, trailing far behind AmazonFresh (31%), Kroger (13%) and Instacart (10%). In New York, where competitors include Fresh Direct, Google Express only has 1% of the market. Amazon offers a similar expedited delivery service to customers through Amazon Prime Now, but it has different pricing and execution strategies compared to Google Express. Amazon Prime Now costs $299 per year, includes free two-hour delivery ($7.99 per order for a one hour delivery), utilizes inventory from both its warehouses and local stores and restaurants, and marks up some prices in comparison to the in-store prices. Google Express costs $95 per year, offers free delivery if order minimums are met ($2.99 for delivery in a two-hour window), utilizes local store inventories to avoid warehousing costs, leverages courier services to deliver the products, and charges the same price available in-store.

To create a streamlined and efficient supply chain while obtaining customer data on purchase decisions, Google had to create a win-win-win for its partner stores, the end customers, and itself. Customers receive products from trusted, reliable sources at the same prices they are accustomed to without leaving their homes; retailers leverage the robust and reputable brand of Google to battle online retailers and expand beyond brick and mortar locations; and Google gets the benefit of collecting consumer data and building a more comprehensive ecosystem.

Within the Google Express model, orders are submitted to Google Express, who then forwards them to the retailers. Retailers pay a commission in return for bringing in business. Google’s primary supply chain strategy circles around responsiveness, with the goal of responding quickly to demand. While differentiation already exists due to various product offerings by multiple retailers, the pricing strategy depends on efficiency. Since retail inventory is being leveraged and couriers are delivering the products, Google Express must maintain a clear and transparent supply chain from the customer orders all the way to the retail locations. The lack of inventory places greater emphasis on retailers to provide Google with accurate and timely data to prevent stock-outs. As Google obtains data, the purchasing patterns of customers will help in anticipating what items to stock and which to pursue further.

To obtain a further glimpse into the usage of Google Express and understand financial implications, we carried out a survey for Google Express subscribers. In this survey, we asked general questions about location, number of orders, value of orders and overall preference of the service. In summary, 44% of our survey respondents were using Google Express of which 55% were from NYC and 22% from LA. The maximum number of orders per week was 10 and the average number of orders was 2.3. The maximum order value was $288, the minimum was $23, and the average was $73. In addition, 32% of the orders did not meet the minimum requirement for free delivery, adding an extra $3 delivery cost. The graph below shows that there isn't a high degree a brand loyalty since most Google Express users also use other services, which is an indication that online shoppers are extremely price sensitive.

As we were researching Google Express, one of our biggest questions was if this service is profitable. We hypothesized that it would not be, and we created a model using a mix of Google Express customer survey data and assumptions about the market. We assumed the average Google express subscriber would make about 120 orders annually, 32% of which would not meet the minimum order limit and incur a $3 delivery charge. We determined that delivery cost per order would be $5. We came to this figure with the assumption that it would take 20 minutes to complete the order (picking up the order from retailer and delivering to the customer’s door) with the average trip distance of 10 miles and assuming a $12 hourly wage. We assumed that Google express captures 1% margin of the goods sold, as retailers typically capture only 2-3% margin and would be unlikely to give up much. With these assumptions, our model shows that Google Express is not profitable. However, if the last mile delivery time was reduced to 7.5 minutes, Google express could be profitable at $8 per customer.

In evaluating the viability of Google Express, it is pertinent to understand Google and the general landscape of the industry. Google, as reflected through their financials, is first and foremost a search company. The primary revenue stream is and continues to be advertising, built around search. However, Amazon is a dominant force and fierce competitor. With customers turning to Amazon for product searches, Google is missing out on data about purchasing patterns. Google is known to invest in a variety of industries, as further indicated by its rebranding attempt to Alphabet, many of which are discontinued or scrapped if they underperform. Google Express is different. Although the model may not be profitable, Alphabet needs to capture customer purchasing pattern data to further enhance the value it offers advertisers, and Google Express is one sure way to do this. Investing in Google Express is the company’s way of investing in its’ core business: search.

In June 2016, the Panama Canal will double its capacity, and this capacity expansion will undoubtedly reshape the freight flows around the globe, including those transiting through the Port of Los Angeles (click here for a past blog related to this subject).

Considered jointly, the Port of Los Angeles and the Port of Long Beach are the 9th largest port in the world, handling most goods transiting between China and the United States. Given the various limitations of the Panama Canal (tolls, congestion, ship tonnage limitation), most goods that need to be delivered from East Asia to the United States are currently unloaded in the Port of Los Angeles and shipped by train to their final destination. Overall, the port activities in Los Angeles is a major activity node in Southern California, employing about 900,000 people throughout the LA County Region and 3.6 million worldwide.

However, the capacity expansion of the Panama Canal may change this shipment pattern. The Panama Canal currently handles about 340 million tons per year, which corresponds to about 14,000 transits per year. This is quite remarkable given that it was originally designed to accommodate 80 million tons per year! The increase of capacity relative to the original design has been achieved through a succession of minor tweaks, such as improvement in the scheduling algorithm, widening of some key bottlenecks, and deepening of some critical channels. Yet, there are only so many ways one can stretch capacity without major investment, and a few years ago, the Panama Canal has undertaken a $5.25 billion capacity expansion effort, which will conclude in June 2016, increasing the total capacity to 510 million tons, i.e., a 50% increase in total capacity, allowing for both larger ships to transit through the canal and increasing total traffic.

This increase in bottleneck capacity will undoubtedly reshape the freight flows between Asia and North America. In particular, it is very much conceivable that, if some ports on the East Coast (such as Miami) develop their logistical infrastructure, it may become more efficient in the long run to ship goods from Asia to the East Coast through the Panama Canal, creating a threat to both the Port of Los Angeles and the railway that currently ship these goods.

How can the Port of Los Angeles respond to this threat? I recommend they follow a three-pronged approach, aimed at improving:

Flexibility, by invest in capability to accommodate both small and large vessels (such as the enormous Ben Franklin ships, which can carry up to 18,000 containers);

Responsiveness, by investing in capacity to alleviate congestion and by streamlining the intermodal transition between ship and trucks or trains;

Reliability, by working with the unions to reduce the likelihood of major strikes (such as the strike that occurred in 2015) that could disrupt just-in-time supply chains.

The good news is that the reshaping of freight flows will not happen overnight: Most ports on the East Coast (with the exception of Norfolk) do not seem yet to be able to accommodate large ships or to have the same level of logistical infrastructure as the port of LA and firms may take some time to reconfigure their supply chains. This should give some time to the Port of LA to get prepared for this increased competition and enhance its service offering. Nevertheless, a major disruption, such as a strike, in the Port of LA leading could easily precipitate this course of action, so adopting a complacent attitude could have severe consequences.

Acknowledgments: I thank Manuel Herrerra for a very good discussion that led to the writing of this blog.